The sentiment of many businesses that have had their R&D claims reviewed by the ATO in recent years has been that the burden of evidence that the ATO requires of taxpayers has been unreasonable. The running joke for many industry insiders is that the R&D used to stand for Research and Development, but nowadays it stands for Record and Document.
A recent decision by the Federal Court confirms that the ATO’s evidentiary goalposts have shifted well away from what is legally required. The case of Commissioner of Taxation v Bogiatto  highlights the difference between what the ATO has been requiring of R&D claimants and what is actually required under law:
Entitlement to the tax offset is not dependent on keeping records to “substantiate that the claimed R&D expenditure was incurred on R&D activities that have been registered with AusIndustry”. Entitlement to the tax offset is dependent on whether the taxable facts are such that the R&D claims were available. Whether those taxable facts can be proved or established is a different issue. A taxpayer who kept inadequate records but who, nonetheless, was able to substantiate the various matters required by the statutory scheme, would still be entitled to the tax offset.
It is a misconception implicit in some of the Commissioner’s submissions that documentary evidence is the only kind of evidence which can substantiate the relevant taxable facts. A taxpayer might have inadequate records yet establish to the satisfaction of the ATO or the Tribunal on review, or a Court for some other purpose, that R&D activities were carried out and that relevant expenditure was incurred. This might be done through witness statements, statutory declarations or the giving of oral testimony. Such material might or might not be supported by documentary evidence. It is not difficult to envisage a situation in which, for example, a taxpayer was able to prove through documentary evidence the total salary paid to particular employees and also establish, through oral testimony, that those employees were engaged in R&D activities and what proportion of the employees’ time was devoted to those R&D activities. The existence of supporting documentary evidence as to what proportion of time was spent on R&D activities might make the testimony more persuasive and the absence of such documentary evidence might lead a tribunal of fact not to accept the testimony or to give it less weight. However, the absence of documentary evidence does not mean the testimony would have to be rejected or was incapable of proving or establishing the relevant asserted facts.
Time will tell whether this decision is reflected in future ATO R&D Tax Incentive guidance material and its compliance activities from this point on.
If you would like to discuss how this decision could impact your business, please get in touch with us to arrange a tailored discussion.
By Dave Corbin, Managing Director of Catalyst Solutions Australia.